A rookie advisor’s best way to mutual fund success

A rookie advisor’s best way to mutual fund success

The easy answer is to take a look at Morningstar’s mutual fund analysis selecting those funds rated four stars or higher.

In other words go with the best.

However, we know that past performance (what Morningstar’s star system is based upon) does not predict future returns, which makes the job of a rookie advisor that much more difficult suggests Toronto advisor Tony De Thomasis.

“You’re starting out [as a rookie advisor] and you’re going to swear by past performance because it looks great for the client; you only have leading funds; and you’re a hero,” said De Thomasis. “However, everything we know from experience is that it doesn’t work that way. I wish it did. If we build accounts only on four- and five-star funds, most times it’s going to disappoint.”

So what’s a rookie to do if he or she can’t rely on past performance?

Well, Morningstar’s got a solution for that too. But rather than look to them for answers, WP instead has leaned on De Thomasis’s experience.

“Over 20-25 years most strategies are going to work out. As long as you don’t change it, it’s going to work out,” said De Thomasis. “In reality clients aren’t going to wait 20 years. If you haven’t got some decent numbers in five years they’re going to leave.”

That’s the “what have you done for me lately” philosophy and it’s so true.

“Using four- and five-star funds doesn’t work so you have to go by styles. When you tell clients to go by styles it means you’re going to have some funds that aren’t going to be five stars, they might be two stars and you try to explain why they are two stars.”

De Thomasis prefers the idea of style over strategy because it’s a less complicated word and easier to explain to most clients. Starting out with value, growth, GARP, relative straight and low volatility, he then moves into large-cap, mid-cap and small-cap styles in order to make appropriate recommendations for the client while delivering a portfolio that will produce over the next five years – and hopefully longer.

So, we might as well cut to the chase.

Who should rookies turn to for mutual fund recommendations?

“You don’t want surprises,” said De Thomasis. “You don’t want a fund too slanted to one style because if that style’s out of favour for too long a period you’re going to have a very unhappy client.”

While De Thomasis is a fan of EdgePoint, he believes Fidelity’s Disciplined Equity series is the way to go.

“For a new guy something like Fidelity Disciplined Equity. They have three series: Global, Canadian and American. With that you know they can never change dramatically their style and so if you like their style of investing those three funds for a new advisor would be a fabulous way to start,” said De Thomasis. “They’ve actually done better than the benchmark indices so you show the client there’s value [in the recommendation].”